Insurance Squabble Punted to Top State Court

BOSTON (CN) — Punting to the state’s top court, the First Circuit found it unclear whether Massachusetts law requires insurers to fund counterclaims as well as defense. The underlying case involves a feud between VisionAid and Gary Sullivan, a vice president of operations it fired in 2011. Though VisionAid says it fired Sullivan for cause — he allegedly misappropriated corporate funds — Sulivan blames age discrimination. Before filing suit in state court, Sullivan had offered to walk away with no money if VisionAid would agree to a mutual release. Still wanting to recover the allegedly stolen money, however, VisionAid balked. The ensuing state-court action prompted an offshoot controversy between VisionAid and its insurer, Mount Vernon Fire Insurance. Mt. Vernon soon filed a federal complaint to determine whether it is responsible for covering the costs of VisionAid’s defense and its counterclaim. After a federal judge ruled for the insurer, VisionAid appealed to the First Circuit. That federal appeals court failed to resolve the case last week, however, instead certifying three questions to the Massachusetts Supreme Judicial Court. The SJC must determine whether an insurer has to cover an affirmation claim as part of its policy to defend, whether an insurer is obligated to cover legal fees in lieu of representation, and whether an insured is entitled to independent counsel in the event that the insurer has an interest in devaluing the counterclaim. “The outcome of this case could affect scores of insurance contracts in Massachusetts, insurance is an area of traditional state regulation, and the policy arguments here do not clearly favor one side or the other,” U.S. Circuit Judge Ojetta Thompson wrote on June 9 for a three-person panel. Representatives from VisionAid and Mt. Vernon did return phone calls seeking comment. The opinion notes that VisionAid’s interpretation of its policy includes coverage of “all work a defense lawyer would typically do in the defense of a client, including prosecuting counterclaims that would defeat liability or diminish damages.” If Mt. Vernon will not provide counsel for the counterclaim, VisionAid says the insurer must at least cover the cost of attorneys’ fees. VisionAid has lastly suggested that the dispute between it and Mount Vernon creates a conflict of interest where VisionAid’s countersuit hinders the insurer’s efforts to settle with Sullivan.